The Banking Stepchild: Money Service Businesses

Many of the major banks have adopted a categorical approach to risk and declined to do business with money service businesses (“MSBs”). A categorical approach may seem justified based on risk tolerance but it represents a simplistic answer to an otherwise complex issue. To put it another way, “it represents lazy compliance thinking” according to Michael Volkov, CEO and owner of The Volkov Law Group, LLC.

In his article here he notes that many MSBs have comprehensive compliance programs and are far less risky than some other financial institutions.

As with any sector there are a broad range of actors. Picking the diamonds out of the rough through the application of targeted processes and platforms is the opportunity Fintech Bank is addressing.

One of the aspects of the industry we operate in, which surprises many, is the significance of wealthy customers using Money Service Businesses, pawn brokers and the like, to cover short term funding needs and to otherwise finance their business ideas, turning to their Rolexes and art collections as collateral for quick and easy loans. This trend points less to financial distress and more to customers eager to seize money-making opportunities.

A handful of lending companies are tapping into the trend let their affluent clients take quick thousand-dollar or million-dollar loans with high-end collectibles as collateral. That’s far greater than the average loan size of $150, according to the National Pawnbrokers Association. Business owners say the way the luxury goods-backed loans are growing points less to the financial distress associated with pawn shops and more to seize money-making opportunities.

Denver-based Luxury Asset Capital has launched an online version called Lux Exchange in late January and has secured a credit line of $50 million from a family office. A big part of the job is “educating the affluent consumer that they have all these assets sitting in their closet,” said Dewey Burke, president and CEO of Luxury Asset Capital. One of his clients was able to use his watch collection to seal a commercial real estate deal. This client spent 10 years trying unsuccessfully to purchase a piece of property, Burke said. When it suddenly came up for sale last year, the client had just one week to close. No bank would provide a loan in such a short time, Burke said. But after the client mailed in “four very, very high-end luxury” watches, Burke’s company was able to provide him with $400,000 in 48 hours.

In 2016, FISCA, a key industry body, surveyed its MSB members about their existing bank relationship; the results were stark

100% said that a secure bank relationship was critical for success

Only 23% were happy with their bank

⅔ never know when their bank might kick them out

Half are actively seeking alternate banking relationship

73% were keen to move to a bank who understands and believes in their business

100% would support the launch of a bank designed to support the industry